Labor Unions Clobber Stocks

By Jack Hough

Speaking to Michigan conservatives ahead of Tuesday’s primary vote, Mitt Romney placed much of the blame for the 2009 bankruptcy of Chrysler and General motors on the United Auto Workers union, saying it made excessive demands.

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Republicans and Democrats may have different beliefs on the matter. But stock investors should put politics aside and take a cue from Mr. Romney’s private equity savvy. Unions and investor returns often don’t mix well, and a new study measures the relationship with striking results.

Between 1961 and 1999, the average company that elected a union went on to lose more than $40,000 in stock market value for each unionized worker over two years. These losses weren’t priced in immediately; on average, they occurred over a period of about 15 months. Losses were largest for firms with the most decisive union wins. The study was performed by David Lee at Princeton and Alexandre Mas at the University of California and a paper describing the results was published this month in The Quarterly Journal of Economics.

Stock investors who bought shares of companies at the time of unionization typically underperformed the market by 10 to 14 percentage points over two years.

Of course, the mission of labor unions is to secure more pay and benefits and better conditions for workers, not to enrich investors. The study authors note that much of the decreased stock value for unionized firms indeed came from a transfer of wealth to workers, but also that some–about one out of each four dollars–was lost to inefficiencies created by the unions.

The negative returns are large enough, and slow enough, to raise the question of whether stock investors can profit from betting against union companies. Use caution. Short-selling, or betting against stocks, carries large risks. Union affiliation is also a difficult thing to measure, and it’s one of many factors affecting stock performance.

For example, Caterpillar has union and nonunion workers. Its shares have multiplied four times in value in a decade on a worldwide boom in construction. Most of its job growth in recent years has been overseas.

A recent exception: When union workers in Ontario refused a pay cut and went on strike, Caterpillar announced this month it would move the operation to Indiana. That state recently became the 23rd to enact “right to work” legislation, which bars unions from collecting fees from workers who don’t wish to join.

There’s another hurdle facing investors who wish to bet against union shares. The supply of them is shrinking. Union membership as a percentage of the U.S. workforce has slid from more than 30% in the 1950 to around 20% in the early 1980s, and to under 12% last year.

For private companies, the union membership rate is less than 7%. For government workers it is 37%.